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Accounting for hospitality: 7 serious red flags

Accountanting for Hospitality

As restaurants, pubs and hotels slowly find their way back to pre-COVID trade levels, it’s no exaggeration to say there’s little room for financial mistakes. This makes accounting and financial analysis in the hospitality industry more important than ever.  Yet most owners are wearing too many hats to really focus on the financial management side of things.  And not using accounting software for hospitality businesses can be a major oversight.

If this applies to you and your business, it’s time to take a look at the way you handle money.  So let’s dive in and learn how to spot the warning signs before they ruin your business.

1. Not having an accounting system that works

An accounting system tracks your business activities and their financial impact. Without systems, processes and people to routinely collect all relevant information, it would be impossible to find out how your business is performing and its financial health.

Sometimes businesses have an accounting system, but key components like the Chart of Accounts aren’t configured to reflect their operations or their industry. As a result, transactions aren’t categorised or grouped correctly, meaning you can’t rely on your financial reports for key decisions.

A potential solution is to run your business with a cloud-based accounting system. These days, the use of accounting software for hospitality is common even amongst small business owners. With affordable and flexible cloud-based products like Xero leading the way, you can combine multiple processes into one integrated solution.  This can include:

  • point of sale (POS),
  • accounting,
  • customer relationship management (CRM),
  • inventory management
  • loyalty programs

Xero accounting software for hospitality

2. Lack of financial skills

Even with the best accounting software for hospitality, you’ll still need someone with financial skills to post transactions or journals correctly and make adjusting entries.

To illustrate, say you’re being paid now for catering services you’ll provide next month. Because the event hasn’t taken place, you’ll record the money received in both your:

  • cash account, and your
  • unearned revenue liability account.

You’ll recognise the amount as revenue only when the service has been provided.

There are other examples of adjusting entries, but the point is, recording financial transactions into your accounting system isn’t just a simple data entry task. You need someone with knowledge and experience for the job.

That being said, a pain point for many small businesses is the lack of budget to hire in-house finance staff.

If you're overwhelmed by accounting, you can outsource it to specialists

Outsourcing your day-to-day bookkeeping to an accountant like POP Business is an affordable alternative. Apart from keeping your books in shape, we offer clients help with:

  • reconciling financial reports and accounts,
  • categorising expenses,
  • processing payments,
  • calculating payroll,
  • preparing BAS statements
  • and more.

3. Not reviewing your costs

Collecting financial information isn’t enough – you’ve got to review it and let data guide your business decisions.

This is particularly relevant when it comes to costs. A key purpose of accounting and financial analysis in the hospitality industry is to understand what drives your costs. Additionally, you should know how they compare relative to your pricing.

Some owners price services and food menu items by copying what competitors are doing, but this strategy can backfire.  If you have higher costs than your competitors, you’ll end up with lower or even negative margin.

The gold standard is to document every purchase and expense – be it the price ingredients or staff wages.  You can then use this data to figure out the cost of providing a menu item or service.  Once this is done you price items correctly.  Developing these skills in basic accounting and financial analysis for the hospitality industry is important to getting your costing right.

4. Not monitoring inventory levels

An area that often causes confusion in managerial accounting for the hospitality industry concerns inventory. There are two potential issues when you don’t monitor inventory levels effectively.

Firstly, having too much inventory on hand, particularly food items with limited shelf life, could result in higher wastage and storage costs. It also means having higher food bills and less available cash.

Secondly, from a financial accounting point of view, you can’t work out your cost of goods sold without taking into account your inventory levels at the start and end of the reporting period.

A common mistake is to treat the inventory purchases you made during a reporting period as the cost of goods sold for that period, but this isn’t the right approach.

5. Mistaking your bank balance as your cash flow

Every business needs cash to survive so cash flow management is one of the most critical accounting essentials for hospitality managers to get right.  Understanding and managing this cash flow is an essential skill for accounting and financial analysis in the hospitality industry.

You can’t simply assess your current cash position by looking at your bank account balance. As mentioned, hospitality businesses often receive money in advance of providing goods or services. The cash received represents future cash flow, even though it’s already in your bank account.

Therefore, a bank balance that includes unearned revenue will make your cash position look healthier than it actually is. The danger is if you unknowingly use your future cash flow to pay for current or past expenses, as this puts you in danger of having insufficient cash flow to meet future outgoings.  If you need some help with your cash flow, check out our article on boosting cash flow.  Or get in touch with POP to help you with your cash flow forecasting.

Cash Flow

6. Activity statements at odds with annual tax return

If your quarterly activity statements don’t add up to your annual tax return, then it’s a clear warning sign that you may have made a mistake somewhere or your accounting system may not be functioning as it should.

You might find engaging an accountant for hospitality useful from a tax compliance perspective, to make sure you can reconcile your activity statements to your annual tax return, and avoid scrutiny from the ATO.

7. Pay disputes

Recent Fair Work Ombudsman investigations into high profile restaurants highlight the danger of getting staff payments wrong.

So if your staff raise concerns about their paychecks, it’s important to take them seriously and investigate. The Hospitality Industry Award has complex rules that change regularly. And unless you have an effective time keeping system as well as accounting or payroll software with automatic update features, it’s easy to see how you might end up paying incorrect wages.

POP Business accounting for hospitality services

If our article has made you think about improving the way you handle the financial management of your business, get in touch with POP Business and let us help you out.

Whether you’re concerned with accounting and finance for the international hospitality industry or from a local perspective, our professionals can make accounting and financial analysis in the hospitality industry less of a headache. Because our processes are tech-driven and streamlined, we can offer top-notch services at affordable prices.

We can also get you set up with Xero at a 20% discount for your subscription.  So you’ll be ready to go with accounting software for hospitality to better manage your cash flow, payroll and more.

Call us today on 1300 180 630!

Patrick Sargent

Patrick Sargent

Patrick Sargent is a Chartered Accountant and registered Tax Agent who is passionate about helping business owners and individuals achieve their goals. He co-founded the cloud and tech-focused accounting firm POP Business back in 2018. Since then, Patrick and his team have won numerous awards and accolades including the 30 Under 30 ‘Tech Innovator of the Year’, and coming in as a finalist in the Australian Accounting Awards 2020.   He has expertise in helping small businesses with a range of accounting services, including tax preparation, financial advisory, accounting and bookkeeping, and personal tax planning, as well as company, trust, and partnership tax returns and more.

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